CFA CFA Level 1 Computing Implied Forward Rates

Computing Implied Forward Rates

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    • cfastaf
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      Can anyone please help me get to the answer.

      Question-(1+0.02062/2)To the power of 4*(1+3f2/2)To the power of 6=(1+0.02243/2)To the power of 10

      Answer= 3f2=0.02364

    • mincemeat23
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      Can’t understand the notation well enough – in any case wouldn’t the answer show the calculations?

    • cfastaf
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      Maybe this is easier to see, how do they get to that answer, this is all that is given

      (1+0.0175)6 x (1+IFR6,2)2 = (1+0.02)8

      IFR6,2 = 0.0275

    • cfastaf
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      This is the full question:

      (1+zA)A x (1+IFRA,B-A)B-A – (1+zB)B

      Suppose that the yields-to-maturity on a 3-year and 4-year zero coupon bonds are 3.5% and 4% on a semi-annual basis. The “3y1y” implies that the forward rate could be calculated as follows:

      A = 6 periods

      B = 8 periods

      B-A = 2 periods

      z6 = 0.035/2 = 0.0175

      z8 = 0.04/2 = 0.02

      (1+0.0175)6 x (1+IFR6,2)2 = (1+0.02)8

      IFR6,2 = 0.0275

      The “3y1y” implies the forward rate or forward yield is 5.50% (0.0275% x 2)

    • mincemeat23
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      What? Your original question and follow-ups seems totally different, even the answers.

    • cfastaf
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      Yea its just a different question but would use the same concept to get to the answer….I just thought i send you a full version of a question i found online. please note the 6, 2 and 8 after the bracket in the equation is to the power of 6, 2 and 8

    • cfastaf
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      any input on this one Min?

      its mainly here I’m getting lost with the algebra:

      (1+0.0175)6 x (1+IFR6,2)2 = (1+0.02)8

      IFR6,2 = 0.0275

    • mincemeat23
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      This one doesn’t seem right. Replacing IFR6,2 with 0.0275 in the LHS equation doesn’t yield the RHS.

      Edit: You posted the wrong notation, it’s (1+0.0175)^6 x (1+IFR6,2)^2 = (1+0.02)^8

      (1+0.0175)^6 x (1+IFR6,2)^2 = (1+0.02)^8

      1.0175^6 x (1+IFR6,2)^2 = 1.02^8

      1.1097 x (1+IFR6,2)^2 = 1.1717

      (1+IFR6,2)^2 = 1.1717 / 1.1097

      (1+IFR6,2)^2 = 1.0558

      1+IFR6,2 = 1.0558^(1/2)

      1+IFR6,2 = 1.0275

      IFR6,2 = 0.0275 

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